Thursday, June 26, 2014

This very interesting paper (in German) outlines the measures which FDR took, starting in 1933, to get the US economy out of its depression. FDRs first priority was, as any leader's should be, to kindle spirits, courage and optimism in the society ("the only thing we have to fear is fear itself"). He used the instrument of 'fireside chats' to bring his message across. Secondly, FDR stigmatized the financial sector as 'unscrupulous money changers' that needed to be brought under control. And, thirdly, he stressed that investment, and only investment, would get the US out of its dire straits.

I used to think that FDR was the champion of deficit spending. Far from it!

FDR embarked on the celebrated
‘New Deal’ after taking office in 1933. From 1933-37, nominal GDP rose 63% and inflation-adjusted GP
rose 43%. Unemployment declined from 25% to 14%. However, the government’s share
of the economy – contrary to all myths – remained flat during this time
(revenues, expenses, budget deficit)!!! Public spending on consumption
even declined from 59% to 56% of total public expenditures! What really
prompted the turn-around was private sector investment which grew by
140% during the period in real terms. Obviously, government policy and
FDRs fireside chats had a lot to do with the optimism which prompted the
private sector to invest, but psychology is half the game in the
economy.

The generally accepted school of thought nowadays is that, when in depression, no one other than the state can trigger the stimulus required to get the private sector going again. That may be true when there is no leadership around. If there is leadership à la FDR around, the private sector will undoubtedly live up to the role which it is supposed to play in a market economy --- not as a predatory
tiger to be shot. Not as a cow that is to be milked. But, instead, as a healthy horse, pulling a sturdy wagon (paraphrasing Churchill).

STERN: How much support would you give long-time unemployed in Germany?Wolf: In any case less than Hartz-IV (the government's unemployment insurance).STERN: But that is only 345 Euros per month!Wolf: I am sure that there are jobs for many which are unemployed in Germany today. I would ask each one of them: 'are you really ready to take on a job even if it doesn't earn you much more than Hartz-IV? Just to protect your dignity?'. Man is similar to a muscle. If it isn't used, it wastes away. People often don't realize how much psychological damage they do to themselves through their inactivity.STERN: Suppose as 45-year old metal worker, head of a family, just fired, comes to ask for your advice. Would you advise him to take a cleaning job?Wolf: Yes. That may sound cynical but changes in life offer opportunities.STERN: But his friends and colleages would declare him as stupid!Wolf: Of course, that requires self-confidence. But he could reply: "Don't make fun of me. The same thing might happen to you tomorrow. Now I have more time for my family".STERN: Again, how much support would be adquate?Wolf: There is a fatal socialist pattern in our mentality which suggests that politics is only good and human if it puts social justice and social equality above all practical reason. That is nonsense. To offer everyone the same opportunties is correct but we have to stop this ridiculous equality doctrine. Men are different. If I give one person 100 Euros today, he might turn them into 200 Euros by tomorrow. Another person might spend the money in a bar. The unstoppable expansion of the welfare state is the best example how one can turn social equality fanatism into one's own prison.STERN: You also coach managers. What can managers learn from a Primate?Wolf: They can learn that, in the long run, only humane management will be successful. An exclusively profit-oriented environment destroys the corporate culture. It undermines motivation of employees. It reduces performance.STERN: What is your anser to those who believe that our economies are on the wrong track?Wolf: We have subjected ourselves to the desire that the state should solve all of our problems. Society is under the tutelage self-annointed virtuous politicians who chase the myth of social justice. These politicians sell us the state as a make-you-feel-good institution. We force them to try the impossible.STERN: What must happen?Wolf: Three proposals. First, let us release the state from its responsibility for our personal happiness. That is our own responsibility. It is sufficient when the state intervenes where real need is. There is no human right for a comfortable life. Secondly, let's stop the centralist efforts to legislate happiness for everyone. And, thirdly, those who govern must demonstrate the moral competence to protect the basis of a human society which finds itself threatened by new technologies and economic pressures. We are talking about eternal values here.STERN: You are extremely frank. As the Abbots Primate, don't you have to act politically correct?Wolf: No one has to do that; honesty is much more important! What disturbs me about political correctness is that it puts everyone under the suspicion of being anti-foreigners or anti-women. Political correctness is a great nebulization, a program to achieve moral slavery.

"Are the Chinese smarter than the Europeans?They may well be in the
long run, for sure they are a lot smarter than the Greeks. The crafty
Greeks are considered to be master wheelers and dealers, but they can't
hold a candle to the Chinese. I have during the last week's visit of the
Chinese trade delegation watched and admired the virtuosi way the
Chinese played the Greeks.They have praised the ancient Hellene
culture and by extension modern Greece. They have compared the ancient
Hellene culture with the Chinese and not found it wanting. They have
expressed that Greece is (at least) as important to the world as China.
They have proven their friendship and confidence in the Greek economy by
signing investment deals for USD 4.6 BIO (3.5 being loans to Greek
controlled shipping companies located in other countries, for ships
build in China. The remaining being Letters Of Intent or confirmations
of previous deals like the Hellenikon). They have hinted that Greece
will soon regain it's well-deserved important role in world politics and
economics. They have hinted that Greece will become the all-important
middle man for all future large transactions between China and Europe.
They have pledged that they will invest in Greek government bonds, a
promise they have repeated once a year since they said it to G.
Papandreou in 2010, an easy promise considering the anonymity of
ownership.And did the suspicious Greeks swallow that? Hook, line and
sinker, flattery will get you everywhere. Watch out Frau Merkel, we
have powerful friends".

Joking aside, this was one of the most exciting games of the tournament so far. I watched it on German TV. Towards the end of the game, the German commentator clearly took sides with the Greeks. In the subsequent discussion, there was clear happiness for Greece's having won. That says everything!

Congratulations!

PS: a commentator below pointed out that the text says: "New Dictatorship (with a swastica), we continue selling out (the
country)". "We said we will raise the country higher. This is what we
meant". Had I known this before, I would not have posted it (I just thought it was a funny picture). I apologize!

The first time I saw a Mikel coffee shop was about 2 years ago; in Katerini. A friend of ours, an interior designer, had shown it to us because he was doing the interior design for the franchise. The entire concept of this franchise seemed brilliant to me. From design
to products to service - the whole package simply looked perfect. I then wrote this article about my Mikel-experience.

I now am happy to see (and most impressed!) that Forbes magazine has discovered this Greek franchise success. Two articles about one company in as many days is quite a feat:

In as much as I once owned and was running a franchise in the US, I think I know quite a bit about franchises. Mikel clearly is tops! The fact that the entire concept was developed and implemented by Greeks in Greece only goes to show that there are indeed great business talents in Greek society. The only trouble is that they don't get the attention which they should get so that other Greeks could learn from and be encouraged by them!

Tuesday, June 24, 2014

"The EU-imposed austerity program is the reason that Greece and Spain are
experiencing a Great Depression now, rather than the obvious (if
fragile) recovery that is well underway in the US. It is a classic own
goal by the mainstream-economics-obsessed bureaucrats in Brussels".

This is the conclusion which Steve Keen draws in this article in the BusinessSpectator. It is a keen conclusion because it suggests, by implication, that Greece would be today in an obvious (if fragile) recovery if there had not been the EU-imposed austerity.

The debate about austerity is as old as the crisis and, to me, it is a bit of a futile debate because a member of the Eurozone can only avoid austerity if someone else lends it the money for it. As long as the EU was not prepared to provide Greece with more bail-out money than they did, the debate becomes academic. The academics may be right but the real world does not give a damn.

Clearly, anyone who argues that all that's needed in a country like Greece to achieve an economic turn-around is government austerity is somewhat single-minded. There has to be a strategic recovery plan and government austerity can be part of that. If the overall plan is good, the negative consequences of government austerity can be alleviated.

I will revert to an oversimplified narrative to illustrate my point. That narrative, which is unrealistically extreme, would suggest that the Greek economy had ceased to generate value on its own account. There was decent growth and employment until about 2008 because staggering amounts of capital flowed into the economy which allowed the economy to import all the products it desired. When the capital flows decelerated, that recycling process (borrowing money offshore to spend it offshore) decelarated even more rapidly. Collapsing growth and rising unemployment are the obvious consequences.

Obviously, the Greek economy had not ceased to generate any value on its own account. However, one decade of the Euro had taken a lot of value generation capacity, never large to begin with, out of the economy. Had one avoided government austerity and had the capital flows been kept alive, the only thing which would have been kept alive would have been the above-mentioned recycling process.

My sense is that government austerity had such terrible consequences for Greeks because no capital was directed towards the rebuilding of the economy's value generation capacity. And, above all, if that value generation capacity is not re-built (or rather: built up) any time soon, Greeks are in for many, many years of economic suffering.

Any national economy has something which, for lack of a better expression, I will call the national economic value generation capacity. I cannot explain how exactly one measures it but common sense tells me it's there. Common sense also tells me that, over time, the country's living standards will be a function of that economic value generation capacity. Excessive capital inflows or excessive austerity can distort the living standards temporarily (whereby 'temporarily' can be quite a long time). The living standards may, temporarily, be far higher or far lower than what the economic value generation capacity would suggest but, at the end of the day, one cannot fool reality. And reality says that if you don't generate any economic value, you won't get any, either. At least over time.

Friday, June 20, 2014

China, as far as I know, has not had to participate in any of the rescue loans to Greece. Those rescue loans, funded by European tax payers, paid off Greece's debt due to foreign lenders; i. e. Chinese banks got their Greek bonds/loans paid by European tax payers. That's smart.

The Chinese Central Bank is not part of the ECBs Target2 settlement system. Target2 financed, among others, Greece's current account deficit of which China, together with Germany, was the largest beneficiary. Put differently, China's current account surplus with Greece was financed by the ECB. That's smart.

Finally, China, as this article from The Guardian reports, has been a very successful investor in the Greek economy since the crisis began with Cosco being the most prominent investment. Put differently, while European tax payers and the ECB have put money into Greece to pay off Greece's foreign creditors, including Chinese ones, the Chinese have put money into the Greek economy to earn a profit. That's very smart!

"No other country in Europe
offers such potential," Captain Fu Cheng Qiu of Cosco sums up the magnitude of China's interest in Greece as cranes in constant motion move
containers from ship to dock outside. "We believe that Piraeus can be
the biggest port in the Mediterranean and one of the most important
distribution centres because it is the gateway to the Balkans and
southern Europe."

As the Chinese premier, Li Keqiang, arrives to conduct an official
three-day visit to Greece, it will be the success of China's state-run
shipping group at the forefront of talks. With Beijing hoping to further
cement its foothold in a country viewed as offering the easiest
entrance to Europe commercially, Chinese officials are eager to
replicate Cosco's business model elsewhere. "The Chinese and Greek economies are mutually complementary," Li
wrote on Wednesday in the daily Kathimerini. "Greece is
accelerating privatisation and infrastructure construction. China will
encourage its well-established enterprises to play an active part in
this process."

The Chinese Premier will undoubtedly receive a warm reception in Greece for having supported Greece so much during the crisis. Chancellor Merkel and Finance Minister Schäuble, on the other hand, had to be given a lot of police protection when they visited Greece. The former can look forward to good future profits on the money they invested in Greece. The latter will sooner or later have to take losses on the money which they lent to Greece. Profits are smart; losses are not.

One wonders why Europeans cannot be as smart as the Chinese. At least smart enough to understand that one needs to make a weak borrower strong if one hopes to get loans back. Smart enough to understand that the greatest investment opportunties are often in economies which need re-building badly. Smart enough to understand that investing holds more profit potential than lending. Smart enough to understand that one gets more praise for investing and creating jobs than for lending and enforcing austerity.

"Our phones are ringing off the hook," says Li Ang, who heads the
capital's Greek-Chinese Commercial and Cultural Association. "Investors
want to buy five-star hotels, wineries and olive oil companies … people
who left with economic crisis are flooding back. Greece is a great
place to do business in and the prices are very good."

Well, it looks like by the time the Europeans will begin writing off their loans to Greece, the Chinese will start collecting dividends on their investments. Maybe it's time for the Europeans to get smart, too!

If all Greek companies with annual sales over 10 MEUR were under one central top management (call it the "Greek Private Sector SE") and if that top management were the best private sector top management around, then that part of the Greek corporate economy which represents 85% of all revenues in Greece's corporate economy and 67% of all assets (in short: the bulk of the Greek corporate economy) would be in top shape within only a few years. The road map how to accomplish that is shown in PwC's study titled "Stars and Zombies". Needless to say: that best private sector top management around would have one of the best and most fun jobs in the entire world!

* at issue are 2.726 companies which had, in 2012, revenues of 141 BEUR, capital employed of 120 BEUR, debt of 61 BEUR and about 470.000 employees (overall: roughly 25% of GDP)
* PwC segregates the companies into "Stars and Almost Stars" (29% of the total), "Grey" (17% of the total) and "Almost Zombies and Zombies" (54% of the total).

It is the Zombie group (54% of all companies) which represents the challenge because it is large: 43% of total revenues; 55% of capital employed; 72% of net debt; 213.000 employees. There the fine line needs to be tread between those which have the potential to be developed into the Star group and the others which should be quickly but orderly liquidated.

One major reason why the Zombie group must be urgently resolved is because it (particularly the 650 'true Zombies') has a negative effect on the cash flows of all other companies: total debt of 61 BEUR is concentrated mostly in the Zombie group and 41 BEUR of that cannot be repaid normally. 97% of the socalled 'trapped debt' is in the Zombie group. Detailed suggestions as to how to restructure that debt are in the PwC study.

The PwC study concludes that the Greek corporate economy is led by 180 "Stars" and another 630 "Almost Stars". The "Stars", of course, are stars but particularly the "Almost Stars" are the backbone of economic activity in the country and represent 52% of EBITDA, 32% of revenues, 18% of fixed assets and 24% of the employees in the overall sample. Clearly, these roughly 800 companies drive the Greek corporate economy!

However, the real challange are those companies which are not in the above Star group but which are not clear zombies, either. There are 1.490 of them and they account for: 56% of revenues; 65 of fixed assets; 55% of employees and 71% of EBITDA. These companies show significant diversity in performance but suffer from excessive debt. Clearly, if this group is restructured with great care separating the wheat from the chaff, great economic value could be preserved and expanded. At the same time, great damage could be done if these companies are not handled with great care and prudence. Mistakes which are made here could not be corrected afterwards.

The strategy for the recovery of the corporate economy should have three dimensions: funding and promoting the two leading groups, restructuring of debt and refinancing the third group and the fast liquidation of the last group.

In ancient times, that is before cross-border services like tourism or transportation had arrived, the formula for a country was quite simple: if you wanted to import products from abroad, you had to export an equivalent amount of products. If you had nothing to export, you would not be able to import anything. Tough luck for domestic consumers desiring perfumes or tea from Asia but --- a fact of life.

2013 was a banner year for Greece's Balance of Payments in as much as a current account surplus of 1,2 BEUR could be achieved. Even more importantly, the trade deficit could be reduced to 17 BEUR, still an enormous amount but sensationally lower than the 44 BEUR in 2008.

And yet --- one has to bear in mind that, even in the banner year 2013, exports accounted for only about 55% of imports! Yes, that is a significant improvement over the 2000s when exports accounted for only 40-45% of imports but one has to take a step back and think of the dimensions: for every Euro that Greece exported, it imported two Euros in exchange (more or less). The USA have been criticized for their trade deficit but exports always covered close to 80% of imports. In crisis-stricken Italy, that ratio is closer to 90%.

My understanding is that Greece has not ever in its modern history exported much, for whatever reasons. That's fine and dandy as long as one accepts the consequence of not being able to import very much which, in turn, leads to the consequence of having a low standard of living. My first visit to Greece was in the mid-1970s and I remember a rather poor country outside metropolitan areas. Fair enough --- you offer little but you also don't demand a lot. A combination of factors (notably the EU membership with its subsidies and the Eurozone membership with its cheap loans) allowed Greece to demand very, very much without a corresponding pressure to offer something in exchange.

The EU Commission's paper is a very academic piece: it applies something called the 'gravity model of trade' and it makes all sorts of most sophisticated regression analyses. However, the bottom line is quite simple to understand: Greece could - and should! - offer substantially more in exchange than it is presently doing. To quote:

"Greece's export potential could be enormous. Greece controls 16% of international shipping, making it the world's largest shipping nation. It is located along one of the world's busiest international shipping lanes - the Suez Canal and the Mediterranean - and at the crossroad between three continents. This makes it a natural gateway for trade between Asia and Central Europe. As part of the EU, it is a member of the world's wealthiest free trade area. It is plentifully endowed with sun, beach and culture, making it a prime tourist destination country".

This reminds me of a statement which I made frequently in the early phases of this blog, namely: 'If only the Greek economy developed the right way, I could see - even without an ouzo - Greece as the economic power house of the Eastern Mediterranean within one generation'.

The paper suggests that Greece's exports fall short by 33% of potential. Thus, Greece ranks only 31st among 39 countries analyzed in the paper. But the really interesting thing is that the paper does not put the blame for that on any lack of skills or competitiveness. Instead, the conclusion is that about three-fourths of the shortfall are accounted for by institutional deficiencies in Greece. To quote:

"For Greece, we find that structural reforms that improve the institutionial framework to the average level of our EU/OECD country sample have the potential to close the exports gap - the difference between actual exports performance and gravity to model prediction by between 54% and 78%, depending on the choice of institutional indicator. Rule of law is required for contract enforcement and the willingness of banks to provide trade credit. Sophisticated exports rely on access to the international value chain and the ability to import requiring light customs procedures".

That, of course, sounds rather theoretical and is difficult to prove in practice. Still, I once took a first-hand look at the practice and I would conclude that practice confirms theory in this case. This is what a successful private export consulter told me a little over a year ago: "The public export promotion agency (which
is quite large) is primarily interested in itself; in its political
influence and in its relations with the public sector. Whether or not
Greek exports are increased as a result of their activities is of
secondary importance to them".

In late 2013/early 2014, the Greek government had elevated the primary surplus to the status of a life-or-death-issue. Fine, let the technocrats have their fun as long as they understand that a primary surplus has nothing directly to do with the functioning of the Greek economy. Going forward, I would strongly recommend that the Greek government elevates the export performance to a life-or-death-issue because that will have a direct impact on the standard of living of Greeks!

Monday, June 16, 2014

The IMF's Review of Greece (the fifth!) covers 226 pages and is full of carrots and sticks. And... there is the following graph:

First a caveat: "Exports excluding oil and tourism" is a misnomer because tourism falls into the services section of the Balance of Payments (BoP). Also, the above numbers differ from the statistics which the Bank of Greece (BoG) publishes on its website. Nevertheless, since BoG and the IMF are indicated as sources, one should assume that the message conveyed by the graph is correct.

This small graph suggests that Greece's exports (however they are calculated) are today running at about 10% below the level of 2007. In fact, they have been declining in the last two years.

Greece is in the fortunate position of having two major revenue categories in the services section of the BoP: shipping and tourism. Thus, Greece can support a much larger trade deficit than other countries would be able to. For example, in 2013, Greece had an overall trade deficit of 17 BEUR, quite an enormous amount (though almost minute compared with the staggering 44 BEUR of 2008), but with revenues from services, other income and current transfers, a positive current account could be achieved.

The issue is jobs and everything else which is related to jobs (income taxes, social contributions, etc.). When a country imports products which could also be produced at home, the country is exporting jobs. When a country does not fully utilize its capacity to export, it is limiting job growth.

Given the substantial internal devaluation which Greece has gone through and given the fact that the Euro today is cheaper against the USD than it was back in 2007, it is hard to explain why Greece's exports could not have expanded in similar fashion as those of the other countries shown in the graph. The only explanation which comes to my mind is that Greece's productive sector, never strong to begin with, has even weakened further during the last years.

Lower prices do not automatically translate into export growth. There has to be an export infrastructure both domestically and internationally. Domestically, there has to be a strong export lobby. There have to be public or private agencies which advise/assist Greek companies in expanding their exports. And, internationally, there have to be export promotion agencies in all countries which would be interesting targets for Greek products.

When a country like Germany follows the strategy of 'exporting its way out of a crisis', one has to take that with a grain of salt given Germany's enormous trade surplus as it stands. When a country like Greece, with its dismal trade deficit, does not follow a strategy of 'exporting its way out of a crisis', it's nothing other than disregarding opportunities.

Friday, June 6, 2014

I came across this Reuters article about Dimitrios Koutsolioutsos, a Greek billionaire who has made his fortune in the last 25 years. Whenever I hear the expression 'Greek billionaire', my reflexes cunjure up images of cronies, corruption, tax cheating and all the rest of it. This billionaire seems different.

Mr. Koutsolioutsos is the founder/owner of Folli Follie, a designer/manufacturer of jewellery, watches and fashion accessories. I had never heard of it, so I asked my wife whether she knew of it. After her immediate 'of course', she showed me right away a Folli Follie watch which she had bought. I must say I liked it. I browsed the company's website and I must say I like their products.

It seems that Mr. Koutsolioutsos is just a regular billionnaire who has created his wealth through the regular life of an entrepreneur who has business ideas and turns them into reality with great success. And all that in Greece? In the midst of a depression?

I would very much like to know what people like Mr. Koutsolioutsos would do if they were in charge of running Greece. Above all, I am certain that there are many other Greeks, perhaps not all billionnaires, who have track records which suggest that could contribute a lot to their country.

Wednesday, June 4, 2014

If only EU parliamentarians had stuck to the principle assigned to EU elections by the Lisbon Treaty! Since they didn't, the EU will now end up with one of two evils, whereby it is questionable which of the two evils is worse.

Evil 1: the European Council (heads of state) pushes through a new President of the EU Commission who is not Jean-Claude Juncker. However qualified that person may be, such a move will be one more, and a very major, piece in the puzzle showing the EU as a non-democratic entity reminiscent of the former UdSSR.

Evil 2: Jean-Claude Juncker becomes the new President of the EU Commission. Then the EU Commission will have a President who will claim that he was democratically elected but who has not received one single vote. Not to mention the fact that I have yet to see one single analysis which suggests that Juncker might have the qualifications for President of the EU Commission.

All of this started with the EU Parliament's (notably Mssrs. Schulz and Juncker) turning the EU elections into a powerplay for the position of President of the EU Commission. Nowhere in the Lisbon Treaty is this role foreseen for the EU elections. This was then compounded by the European Council's allowing itself to be trapped into seemingly condoning this approach. Instead of responding to the EU Parliament's powerplay forcefully from the start by pointing out what the Lisbon Treaty said, they allowed things to unfold and, in the end, even endorsed this powerplay: leading heads of state publicly endorsed Schulz/Juncker as their candidates, creating the impression that they would accept the winner as the next President of the EU Commission.

To put things into place: this was an election to the EU Parliament! If anything, voters could have expected that they would elect the new President of the EU Parliament! At least they should have expected that any candidate in these elections would in fact be a candidate for the EU Parliament. In actual fact, at least two of the candidates in play (Jean-Claude Juncker and Alexis Tsipras) were not even on any election list. Furthermore, Juncker had made it clear from the start that he would not work in the EU Parliament.

What a democratic farce is that when a top candidate for the EU Parliament isn't even prepared to run for a seat in that parliament? Whatever one may think of Martin Schulz, the former mayor of a 40.000-people city in Germany, as a candidate for a top job in the EU, at least he had the courage to give the voters of his country the chance to vote for him (he was No. 1 on the SPD list). As I said, Juncker was not on the list of any party in any country. And in his own country he was just recently voted out of government.

Alexis Tsipras is now being praised, by some, for having given Chancellor Merkel a lesson in democracy by expressing his support of Jean-Claude Juncker. What a farce! If Tsipras really had had such a high regard for the EU Parliament, he would have made himself No.1 on SYRIZA's election list to make sure that he could work in that parliament instead of downgrading that institution to a jumping board for another job. Instead, a brief glance at the quality of the people on SYRIZA's election list shows clearly what this party thinks about the importance of the EU Parliament.

As I said, there is now no good solution possible; the end result will be bad for the EU. Responsible for this mess are those who started the process of a powerplay, notably Mssrs. Schulz and Juncker, and the heads of state of allowed this powerplay to unfold (notably David Cameron and Angela Merkel).